Markets Give Glimpse of Future if War Starts
The financial markets gave Americans another glimpse Monday of how war could affect their everyday lives as oil and gold prices shot skyward and the value of stocks and bonds fell. Fixed-rate mortgages, tied to long-term bond yields, also continued to rise due to fears of war and political instability.
The economic well-being of the average person now rests with the success or failure of last-minute peace negotiations--or, failing that, the ability of the United States to win the war quickly and decisively, economists and industry experts said Monday.
“The outcome for both the financial markets and the economy turn entirely on the political situation in the Middle East,” said Hugh A. Johnson, chief investment officer at First Albany Corp. in New York.
Successful peace negotiations--or even a quick U.S. victory--could have a euphoric effect on the economy, some economists said. Interest rates, oil and other commodity prices are expected to fall once this crisis is over, and that would leave Americans with more income to spend. Moreover, some economists believe that there will be a release of pent-up demand, as relieved consumers make long-postponed purchases of clothes, housewares and durable goods.
On the other hand, a long war would likely force consumers to pay more for everything from food to airline tickets while eroding the value of many assets such as homes, stocks and bonds. The combination could wreak economic havoc, deepening and stretching out the current recession.
More troubling still is that the economic ruin would not end the moment the war was over, economists said. If there were a long conflict, the U.S. deficit would soar, making it more difficult for the government to lower interest rates. Relatively high interest rates could temper consumer spending. At the same time, presumably, the government would also be cutting back since it would no longer need new tanks, planes, uniforms and other goods for the war effort.
“For the man in the street, that would mean (that) the end of the war would not end his problems,” Johnson added. “There would be a transition period after the war when the economy would have to be retooled to a peacetime economy. In other words, there could be a real recession after the end of a long war.”
On Monday, Wall Street provided the graphic illustration of how much depends on the Persian Gulf.
The Dow Jones industrial average closed down 17.58 at 2,483.91, after spending the day riding the roller coaster of public opinion. In the morning, when news that talks between Iraq and U.N. officials had failed to result in a peaceful settlement, the Dow plunged by nearly 40 points, only to rise 30 points later in the day, when rumors surfaced that Iraq might be willing to pull out of Kuwait shortly after the U.N. deadline. When faith in the rumor faded, so did the market’s brief rally.
“The market is reacting to every word that is spoken from Iraq, Washington or Geneva,” said Angelo Mozilo, president of Countrywide Funding, a large mortgage banking firm headquartered in Pasadena. “Generally, things are getting worse because people fear that war is inevitable. And with war comes uncertainty, and with that comes market volatility.”
Prices for the benchmark 30-year Treasury bond fell 63 cents per $1,000 of face amount Monday, pushing the yield up to 8.37% from 8.36% on Friday. Fixed mortgage rates are based on these bonds, so the cost of financing a home also climbed.
Countrywide hiked its points--the upfront fees charged for taking out 30-year loans--to 2.75% from 2.25% of the value of the loan in response to the bond market activity Monday. Countrywide said these fees have soared from 0.5% in just the past week and a half because of the Persian Gulf crisis. In dollars and cents, that means that it costs $2,250 more today to take out a $100,000 mortgage than it did less than two weeks ago.
Mortgage banking firms are often the first to hike rates in response to market changes. However, Great Western Bank said it had hiked interest rates on 30-year fixed-rate mortgages last Friday to 10% from 9.70%. Further erosion in bond prices could force rates up even more, added Sam Lyons, senior vice president of mortgage banking.
Meanwhile, commodity prices--often an indicator of inflationary pressures--soared.
Crude oil for February delivery jumped $3.49 to close at $30.78 a barrel on the New York Mercantile Exchange. February gold prices rocketed $8.30 an ounce to close at $401.60.
The price of oil is pivotal to consumers because oil prices affect the cost of many goods and services, from plastics and rubber to foods that must be trucked into local supermarkets.
The dollar, which is considered a safe haven in times of political turmoil, rose Monday against most major currencies as well.
“The market is going to stay on the defensive until we know whether it is war or peace,” said Michael Sherman, chief investment strategist at Lehman Bros. The Dow on the Hour Dow Jones index of 30 industrial stocks Friday Close: 2,501.49 Monday Close: 2,483.91, down 17.58 The Dow on the Hour, Los Angeles Times
